-3x Short China Regulatory News (SCHE)

Southern Cross Healthcare Group PLC

-- Interim Results --

Thursday, 19 May 2011 - Southern Cross Healthcare Group PLC (LSE: SCHE) ('Southern Cross', 'the Group', or the 'Company'), the UK's largest care home provider, announces its interim results for the six months ended 31 March 2011.

Key point summary:

Restructuring

·; Support of Company's lenders maintained with testing of all financial covenants now being deferred until 30 June 2011

·; Principal landlords discussions ongoing, to reshape the portfolio and reduce rental costs

Financial

·; Revenue decreased by 3.4% to £464.3m (H1 2010: £480.7m)

·; Home EBITDAR before central costs decreased by 11.2% to £124.8m (H1 2010: £140.6m)

·; Adjusted EBITDA of £7.4m (H1 2010: £28.0m)

·; The operating loss before all exceptional items and charge for future minimum rental increases was £6.8m (H1 2010: profit £15.0m)

·; The loss before tax was £310.9m (H1 2010: loss £22.9m), of which £267.8m was a non-cash accounting charge, comprising the write-off of goodwill (£219.2m) and the impairment of the value of property, plant and equipment (£48.6m)

·; Adjusted loss per share was 21.90p (H1 2010 earnings per share: 5.26p)

·; Net debt at period end of £14.4m, up from £7.3m at previous year end

Operations

·; Labour Effectiveness programme launched with projected annual savings of £20m

·; Self funding admissions up by 14.9%

·; Regulatory embargoes currently down from 27 to 18

·; Staff turnover has reduced from 26.8% to 22.9%

·; Average occupancy in mature estate of 86.9% (H1 2010 restated: 90.0%)

·; Average weekly fee up 1.1% to £559 (H1 2010: £553) though with local authority fee decreases from April 2011, expected to be 0.6% based on formal offers received from local authorities

Christopher Fisher, Chairman, commented:

"Southern Cross is a low margin business and the progressive squeeze on its revenues over the last 12 months, while facing many upward pressures on its costs, means Southern Cross is now in a critical financial position and cannot afford to meet its future rent obligations in full. Reflecting this reality, it has taken a major book write off of its goodwill and certain other assets through these interim accounts.

"Southern Cross' stakeholders - landlords, lenders, shareholders, the various components of government, management and employees - all give overriding priority to maintaining the quality of care for Southern Cross' 31,000 residents.

"Over the coming weeks the key stakeholders will need to agree on a comprehensive package to restructure Southern Cross' financial affairs so that a new, stable and sustainable corporate and business model can be developed and introduced to underpin the continued successful operation of Southern Cross' homes. In the view of the Directors, there are reasonable grounds for believing that such an outcome can be secured and it is the responsibility of all stakeholders to work to that end."

Enquiries:

About Southern Cross

Southern Cross is, in terms of number of beds, the largest UK provider of care home services for the elderly and a major provider of specialist services for people with physical and/or learning disabilities. The Group's care homes for the elderly operate under two distinct brands: Southern Cross Healthcare and Ashbourne Senior Living. Both brands provide a range of social and personal care services and nursing care services for elderly people with physical frailties and differing forms of dementia. The Group's specialist services operate under the Active Care Partnerships brand and provide long-term care services for people with physical and/or learning disabilities and for younger people with complex forms of challenging behaviour.

Southern Cross is focused on providing high quality care in well invested facilities, seeking to be the home of choice in each local community in which it operates. The Group provides care services for most of the local authorities in the UK which, together with the NHS, represent circa 78% of the Group's revenues. Its care home portfolio is largely purpose-built with a high percentage of single occupancy rooms and rooms with ensuite bathrooms.

Notes

Home EBITDAR is defined as earnings before interest, tax, depreciation, amortisation, rent, profit on disposal of property, plant and equipment, onerous contracts and related impairment, impairment of assets and charges for future minimum rental increases.

Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation, profit on disposal of property, plant and equipment, exceptional central costs, onerous contracts and related impairment, impairment of assets and charges for future minimum rental increases.

Adjusted earnings per share is defined as earnings before charges for future minimum rental increases, exceptional central costs, loan arrangement fees written off, profit on disposal of property, plant and equipment and subsidiary undertakings, impairment of assets, onerous contracts and related impairment and the taxation impact thereof, divided by the weighted average number of shares.

Mature occupancy excludes immature beds, newly developed homes or refurbished homes which have been trading for less than 12 months.

At the beginning of FY2011, the Group has reclassified 1,303 rooms as single occupancy. In order to present information on a like-for-like basis, the available beds for FY2010 have been restated to reflect this adjustment. This has had the net impact of reducing the number of available beds across the Group in FY10 by 1,303 beds, and increased average occupancy for H1 FY2010 by 2.9%.

Chief Executive's Statement

Overview

Since March we have provided regular updates to the market and to our stakeholders regarding the very serious financial position which the Group faces. This is consequent on the trading deterioration experienced in the face of declining local authority admissions and significant fee reductions in real terms.

During the last few months, we have secured the continued support of our lenders and we have also advanced our negotiations with our landlords in order to seek a restructuring of our rental obligations. KPMG LLP, Greenhill & Co and Clifford Chance LLP have been appointed to advise us on securing the appropriate financial structure between key stakeholders whilst also evaluating the role which new capital can play.

Whilst there can be no guarantee of success, the Board believes that there are reasonable prospects of a successful conclusion to these important discussions, notwithstanding the uncertainty which remains around the exact form and timing of the restructuring.

I continue to be greatly encouraged by the support which we have received from all key stakeholders as we seek to resolve Southern Cross' current financial difficulties. In particular, our 44,000 staff continue to provide high standards of care for our 31,000 residents in a manner which bears testimony both to their dedication to the caring profession and to their belief in the long term opportunities for our company.

Business Update

Restructuring

Given the complexity of the financial restructuring which is being undertaken, we have already announced that we have asked landlords to provide working capital support through the summer period so that the Group has sufficient time to develop fully its proposals for consensual restructuring.

We have commenced discussions with our lenders seeking to modify our longer term banking arrangements and to agree suitable financial covenants which better reflect the current and future expected levels of trading and performance.

We believe that it is in the best interests of all stakeholders that a carefully orchestrated restructuring takes place which continues to prioritise the provision of high quality care to our residents.

New Horizons

Against this rather sombre background, significant progress has been made in the operational turnaround of the business as we continue to implement the New Horizons programme of change.

Since the financial year commenced, the Group maintained its focus on improving care quality, as a result of which the number of homes subject to regulatory embargo has reduced from 27 to 18. Significant progress has been made in the development of next generation services covering dementia, end of life and re-ablement, all of which are being trialled in co-operation with the NHS and which feature in our new Care Strategy which was recently launched.

In May we announced a 4-month programme of engagement with our 42,000 care home staff which is aimed at ensuring we operate more effectively across our homes. In addition, our time and attendance system has now been rolled out to over 200 homes and is generating incremental staff cost savings of 2%. Overall annualised staff turnover has reduced from 26.8% to 22.9% which is close to the 22% target which we set for the end of 2011.

The New Horizons programme will be complete at the end of 2011, as planned.

Trading

Revenues in the first half of FY2011 were £464.3m (2010: £480.7m) reflecting continued reductions in local authority placements and fee pressure. During the first half of FY2011 local authority admissions were 15.1% lower on a like for like basis and 6.7% lower than the second half of FY2010. This effect was partially offset by increased NHS admissions of 2.3% and self funder admissions which were up 14.9%.

As a result, mature occupancy in the first half of FY2011 was 86.9%, 3.1% lower compared to the same period in FY2010.

Overall fee levels have been slightly higher than anticipated with an average weekly fee rate of £559 compared with £553 in the equivalent period of the prior year. Within this mix, the average local authority fee was £521 compared with £518 in the prior year. Following the implementation of budget reductions, as a consequence of the Comprehensive Spending Review, we anticipate that overall local authority fee levels will decrease by 0.6% from 1 April 2011, based on formal offers received to date from local authorities.

Outlook

The Board recognises that in the event it does not reach agreements with its landlords and lenders, the Group will require alternative finance in order to continue to trade. If negotiations with landlords are successful, this is likely to increase the attractiveness of the Group to further investment, which will improve growth prospects.

Whilst there are material uncertainties ahead, an appropriate financial restructuring of the Group will create a stronger Southern Cross with a sustainable and profitable future.

Jamie Buchan

Chief Executive

19 May 2011

Financial Review

Given the challenging operating environment which the Group faces, two key accounting issues have to be addressed in the preparation of the consolidated financial statements. These are, firstly, to consider whether or not the business should prepare accounts on a going concern basis; and secondly, to consider whether the non-current assets shown on the balance sheet have been impaired (reduced in value). In summary, the conclusion of the Board is that the going concern basis is an appropriate basis upon which to prepare the accounts; however, the carrying value of assets has been substantially impaired, leading to a non-cash write-off of £293.0m (£219.2m of goodwill, £48.6m of fixed assets and £25.2m of deferred tax assets). Excluding these write-downs, the Group would have lost £43.1m after tax. Within this figure, the Group made adjusted EBITDA of £7.4m and generated total positive cash flow from operations of £6.1m.

Basis of Preparation - Going Concern

This interim report is prepared on the basis that the Group is a going concern. In considering the basis on which to prepare this interim report, the Board has taken into account a decline in new Local Authority admissions, a lower than originally expected round of fee increases (and in some cases requests for decreases) from Local Authorities and as a consequence pressure on its current and future cash position, coupled with potential breaches of the covenants attaching to its banking facilities. As a result it is undergoing intense negotiations with its landlords and lenders with a view to agreeing both a restructuring of its rents and to ensure the longer term availability of its banking facilities; the final outcome remains uncertain.

The Board considers that, whilst it will be difficult, it is reasonable to anticipate that the Group will be able successfully to conclude these discussions in both the short term (the Summer Platform referred to below) and the longer term, but recognises there is material uncertainty with respect to the timeframe and achievability of this.

In forming its opinion as to going concern, the Board has prepared cash flow projections based upon its assumptions as to trading, as well as the continued availability of its banking facilities. The Group's cash flow projections and underlying assumptions reflect the Board's expectation that the Group will reach agreement on long term rent reductions with its landlords and the continued availability of banking facilities from its lenders. The Group has engaged the services of KPMG, Greenhill and Clifford Chance to assist the Group in its discussions with financial stakeholders in pursuit of a significant restructuring of its lease obligations to its landlords and its banking facilities, and the introduction of new capital.

The Group's existing bank funding arrangements comprise a Revolving Credit Facility of up to £50m. The terms of that facility include covenants based on operating performance, and a breach of those covenants could result in withdrawal of the facility. Because of the likelihood of a covenant breach, in March 2011 the Group requested, and in April 2011 its lenders agreed, to defer the testing of all financial covenants until 31 May 2011, subject to weekly review and other conditions.

On 9 May 2011, and in line with the existing agreement, the Revolving Credit Facility stepped down from £50m to £45m. The Group recently requested, as a result of concerns arising from updated cash projections, that its lenders agree to the facility limit being restored to £50m and the testing of all financial covenants be deferred, in each case until 30 June 2011. The lenders have now agreed to this request. The continued availability of the facility is subject to weekly reviews and the satisfaction of other conditions.

The Group has commenced discussions with its lenders regarding the four month Summer Platform and the longer term availability of its banking arrangements and to agree suitable financial covenants which better reflect its current and future expected levels of trading and performance, in the context of the wider restructuring.

The Group has been engaging its landlords in discussion with regard to the level of rent payments and other lease terms for some months and in recent weeks this has been stepped up. Each landlord has been approached with a proposal to agree concessions which would assist the Group. Following Group presentations to landlords in April and May, the Group has made a request for a four month Summer Platform to allow time to develop further its proposals in what is a complex situation. As part of the Summer Platform, landlords have been asked to agree to a four month deferral of 30% of the current aggregate rent charge with effect from 1 June 2011. The combination of landlords agreeing to the requested deferral of rent and the continuation of the restored facility at the £50m level should provide sufficient liquidity for the Group to continue meeting its obligations until 30 June 2011. Current forecasts suggest, however, that additional liquidity support will be required to enable the Group to continue to meet its obligations over the balance of the four month Summer Platform. The Group's principal landlords have agreed to the formation of a committee, to act as an efficient conduit for the restructuring discussions and to ensure that negotiations continue to progress in a timely manner.

The Group needs to reach agreements with its landlords and lenders in support of the Summer Platform. Furthermore, even if a Summer Platform is agreed, there remains the challenge of negotiating a longer term restructuring of the rental and other terms of the Group's lease portfolio.

Other factors that the Board has considered in preparing this interim report are:

·; The impact of the recent reduction in occupancy levels, particularly through reduced admissions from Local Authorities, which have a material impact on cash flow and profitability of the Group.

·; The downward pressure on average weekly fee rates being paid by Local Authorities which are reducing the Group's profit margins, particularly as a large proportion of the Group's costs are subject to inflationary pressures and that while tight cost control is critical, the Board does not intend to make reductions to the quality of care it delivers or to put residents at risk.

The matters set out above indicate the existence of material uncertainties which cast significant doubt over the Group's ability to continue as a going concern. In the event that the Group does not reach agreements with its landlords and lenders, and no alternative finance is available, the Group is unlikely to be able to continue to trade. In these circumstances additional liabilities and provisions may arise and adjustments may be required to the carrying values of assets. Despite these concerns, the Board confirms its belief that it is appropriate to use the going concern basis of preparation for this interim report.

Impairment of Assets

During the period, the Group has conducted an impairment test on the carrying value of fixed assets and goodwill. The requirements of IAS36 'Impairment of Assets' require the Group to assess the value of assets, based on future cash-flows which reflect current contractual obligations (including current rental agreements), rather than those terms it is pursuing as part of its exercise to restructure its property leases. As a result of this review, the carrying value of goodwill has been fully impaired, resulting in a charge to the income statement of £219.2m. Of this impairment charge, £192.9m related to goodwill arising on the acquisitions of Highfield, Cannon Capital and Southern Cross Bidco and subsidiary undertakings, which were made over 5 years ago. This review has also resulted in the carrying value of property, plant and equipment being impaired by £48.6m and there has been a write-off of deferred tax assets totalling £25.2m. These impairment charges, which total £293.0m, are accounting charges and do not represent a cash charge.

Trading

Revenue Statement

At the start of the previous financial year, the Group changed its internal reporting cycles and now reports on a calendar monthly basis (previously the Group reported 13 periods of 4 weeks). The results for the period ended 31 March 2011 are therefore for a period of 182 days (FY2010 185 days).

At the beginning of the current financial year, the Group has reclassified 1,303 rooms as single occupancy. In order to present information on a like-for-like basis, the available beds for FY2010 have been restated to reflect this adjustment. This has had the net impact of reducing the number of available beds across the Group in FY2010 by 1,303 beds, and increased average occupancy for H1 FY2010 by 2.9%.

The Group's operating performance is summarised in the following table:

1 Adjusted EBITDA represents EBITDA after adding back charges for future minimum rental increases and exceptional central costs.

2 At the beginning of FY2011, the Group reclassified 1,303 rooms as single occupancy. In order to present information on a like-for-like basis, the available beds for FY2010 have been restated to reflect this adjustment.

Revenue

During the period, revenue decreased by £16.4m to £464.3m. Excluding the additional 3 days in the prior year period of account, revenue decreased by £8.7m. An increase in the average weekly fee rate from £553 to £559 increased revenue by £5.0m compared to the prior year, however this was offset by a decrease in average occupancy of 946 residents which reduced income by £13.7m.

Average occupancy in the period was 86.9% for mature homes and 85.8% for the network in total (Q1 2010: restated 90.0% and 88.5% respectively). During the first half of FY2011, like for like admissions reduced by 8.6% with a 15.1% reduction in local authority admissions offset by a 2.3% increase in admissions from the NHS and a 14.9% increase in self funder admissions. The reduction in local authority admissions is reflective of cuts in service provision to older people in direct response to reduced central government funding.

Home Operating Costs

Home payroll costs decreased £1.7m from £279.3m to £277.6m. Excluding the additional days in the prior year period of account, payroll costs increased by £2.8m.

Home running costs were 13.3% of revenue, compared with 12.6% for the comparable period of 2010. In absolute terms, excluding the additional days in the prior period of account, costs increased by £2.1m. This increase was driven by inflation (including the VAT increase) of £1.1m, and an increase in planned maintenance (£1.0m).

Rent

Rent, excluding the non-cash charge, represents 21.6% of income (2010: 20.3%).

The rent charge for the period, including a non-cash charge of £23.8m (2010: £26.3m) for future minimum rental increases, amounted to £124.2m (2010: £124.0m). Excluding the non-cash charge and the 3 additional days in the prior year's period of accounts, the rental charge for the period increased £4.3m. The increase was driven by new leases completed in the previous financial year (£1.2m), leases with average fixed increases of 2.6% (£1.8m), leases with RPI linked average increases of 4.3% (£1.0m) and leases subject to 5 yearly increases of £0.3m.

Central Costs

Central costs for the period, including £4.7m (2010: £3.3m) in respect of exceptional central costs, were £21.7m (2010: £18.2m). Excluding these exceptional costs and the 3 additional days in the prior year period of account, costs increased by £2.3m, driven primarily by an increase in HR and training costs. As a percentage of revenue, central costs (excluding exceptional costs) equated to 3.7% (2010: 3.1%).

Exceptional Central Costs

During the period the Group incurred non-recurring, exceptional costs of £4.7m. Of this, £0.6m related to the "New Horizons" programme with the majority of the programme now complete. Other exceptional central costs totalled £4.1m, and related primarily to costs incurred in respect of ongoing restructuring.

EBITDA

Loss before interest, tax, depreciation and amortisation ('EBITDA') for the period was £21.1m (2010: £1.6m loss). Excluding the impact of future minimum rental increases under IAS 17 and exceptional central costs, Adjusted EBITDA was £7.4m (2010: £28.0m).

Impairment and Other Charges

During the period, the Group has conducted an impairment test on the carrying value of fixed assets and goodwill. As required by accounting standards, this review has been conducted based on the Group's current contractual obligations, rather than the terms it is pursuing as part of its exercise to restructure its property leases. As a result of this review, the carrying value of fixed assets has been impaired by £48.6m. If the Group is able to agree amendments to its lease terms with its landlords, then some or all of the impairment may be reversed.

This review has also resulted in the carrying value of goodwill arising upon past acquisitions being fully impaired. The impairment charge of £219.2m is an accounting charge and does not represent a cash charge.

Impairment of property assets held for sale

During the period, the Directors reviewed the carrying value of the Group's freehold properties. Following this review, a number of properties were found to have fair values lower than their carrying values. As a result, the carrying value of the related freeholds has been written down by £1.3m.

Onerous Contracts and Related Impairments

During the period, management took the decision to close two of the Group's care homes. Manor Court, situated in South Yorkshire, was closed in December 2010, and Throckley Grange, a home located in the North of England, was closed in February 2011. The closure of the homes was due to the buildings not meeting the minimum standards required by the Group and other commercial factors. As a result of these decisions an onerous contract charge of £5.0m has been recognised in the period and included £0.3m of related impairment charges.

Net Finance Costs

Net finance costs for the period amounted to £1.5m (2010: £1.8m) with the reduction to prior year of £0.3m being due to lower levels of debt.

Taxation

The Group has not recognised any deferred tax assets in the current period and has reversed all the deferred tax assets previously recognised as at 30 September 2010 (totalling £25.2m) as the Group is uncertain as to whether they could be utilised in the future. The restructuring which the Group is undertaking may result in the reinstatement of the deferred tax asset if it is foreseeable that there will be future taxable profits against which the deferred tax asset can be recovered.

Loss per Share

The loss per share for the period was 178.68p (2010: 9.52p). Adjusted loss per share for the period before future minimum rental increase charges, onerous contract charge, exceptional central costs, impairment of goodwill, freehold assets and property, plant and equipment, and the taxation impact thereof was 21.90p (2010: earnings per share 5.26p).

Cash Flow

Net increase in cash during the period was £6.1m (2010: £25.0m decrease). Cash inflow from operations for the period was £8.5m (2010: £9.4m), representing a cash conversion ratio compared to adjusted EBITDA of 114.9% (2010: 33.6%).

Net finance charges paid during the period amounted to £1.9m (2010: £1.3m) and included £1.1m (2010: £0.2m) relating to loan arrangement fees in respect of the extension to the Group's banking arrangements, agreed on 6 December 2010. Excluding these amounts, payments reduced by £0.3m reflecting lower levels of debt.

During the period, the Group invested in fixed asset additions totalling £13.7m (2010: £17.8m) relating to property, plant and equipment. Within this total expenditure, the improvement of leasehold properties amounted to £1.5m (2010: £1.2m), development expenditure on new properties £nil (2010: £2.4m), investment in IT systems £2.3m (2010: £0.7m) and £9.9m on the underlying portfolio (2010: £13.5m).

Net cash generated from financing activities amounted to £13.2m for the period (2010: £32.4m cash used in) and included net new bank borrowings of £13.5m.

Net Debt and Financing

During the period since the 2010 financial year end, the Group's net debt has increased by £7.1m to £14.4m. Bank borrowings have increased from £7.5m at the year end to £21.0m at 31 March 2011.

As at 31 March 2011 the Group had committed bank facilities of £50m, against which it had loans drawn of £21.0m, finance lease obligations of £0.7m and guarantees issued of £11.8m, leaving £16.5m of undrawn facilities.

The Group's existing bank funding arrangements comprise a Revolving Credit Facility of up to £50m. The terms of that facility include covenants based on operating performance, and a breach of those covenants could result in withdrawal of the facility. Because of the likelihood of a covenant breach, in March 2011 the Group requested, and in April 2011 its lenders agreed, to defer the testing of all financial covenants until 31 May 2011, subject to weekly review and other conditions.

On 9 May 2011, and in line with the existing agreement, the Revolving Credit Facility stepped down from £50m to £45m. The Group recently requested, as a result of concerns arising from updated cash projections, that its lenders agree to the facility limit being increased to £50m and the testing of all financial covenants be deferred, in each case until 30 June 2011. The lenders have now agreed to this request. The continued availability of the facility is subject to weekly reviews and the satisfaction of other conditions.

The Group has commenced discussions with its lenders regarding the four month Summer Platform and the longer term availability of its banking arrangements and to agree suitable financial covenants which better reflect its current and future expected levels of trading and performance, in the context of the wider restructuring.

Forward-looking Statements

Certain statements in this interim report are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

The Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Principal Risks and Uncertainties

Southern Cross, like all businesses, faces a number of operating risks and uncertainties. Notwithstanding discussions outlined above relating to going concern, there are a number of risks that could impact the Group's long-term performance and steps are taken to understand and evaluate these in order to achieve our objective of creating long-term sustainable returns for Shareholders.

The Group has a risk management process in place, which is designed to identify, manage and mitigate business risk. Regular reporting of these risks and the monitoring of actions and controls is conducted by the Audit Committee, which reports its findings to the Board.

The most fundamental risks faced by the Group are:

• failure to meet bank covenants;

• failure to negotiate reduced rental agreements with the Group's landlords;

• budgeted occupancy levels are not achieved with negative effects on profits;

• failure to comply with regulations, possibly leading to revocation of registrations;

• failure to achieve quality standards, possibly leading to the suspension of admissions to our homes;

• severe negative publicity for the Group;

• average weekly fee increases do not rise, at least, in line with costs putting profit margins under pressure; and

• failure to attract and retain nursing and other qualified staff, adversely impacting admissions.

David Smith

Finance Director

19 May 2011

Statement of Directors' Responsibilities

The Directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union, and that the interim management report herein includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8.

The Directors of Southern Cross Healthcare Group PLC are listed on page 26.

By order of the Board

J Buchan

19 May 2011

D Smith

19 May 2011

Independent Review Report to Southern Cross Healthcare Group PLC

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2011, which comprises the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Shareholders' Equity and the related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Emphasis of matter - going concern

In arriving at our review opinion, which is not qualified, we have considered the adequacy of the disclosures made in the basis of preparation note (note 1) within the condensed set of financial statements concerning the Company's ability to continue as a going concern. These disclosures indicate the existence of material uncertainties which cast significant doubt on the Company's ability to continue as a going concern.

Randal Casson (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

Newcastle upon Tyne

19 May 2011

Notes

a) The maintenance and integrity of the Southern Cross Healthcare Group PLC website is the responsibility of the Directors; the work carried out by the Auditors does not involve consideration of these matters and, accordingly, the Auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Consolidated Income Statement

For the 6 months ended 31 March 2011

All of the above activities relate to continuing operations.

The notes on pages 15 to 25 form part of this financial information.

The Consolidated Income Statement above represents all the gains and losses incurred by the Group during the periods presented and therefore no separate Consolidated Statement of Comprehensive Income has been presented.

1 EBITDAR represents earnings before interest, tax, depreciation, amortisation, profit on disposal of property, plant and equipment, impairment of assets, onerous contracts and related impairments, and rent.

2 EBITDA represents earnings before interest, tax, depreciation, amortisation, profit on disposal of property, plant and equipment, impairment of assets, and onerous contracts and related impairments.

3 Adjusted EBITDA represents EBITDA after adding back exceptional central costs and the charge for future minimum rental increases.

Consolidated Balance Sheet

As at 31 March 2011

The notes on pages 15 to 25 form part of this financial information.

Consolidated Cash Flow Statement

For the 6 months ended 31 March 2011

Note

Included within the purchase of property, plant and equipment are improvements to leasehold properties totalling £1.5m (2010: £1.2m), development expenditure on new properties totalling £nil (2010: £2.4m) and investment in new IT systems £2.3m (2010: £0.7m). Excluding these amounts, expenditure on the underlying portfolio amounted to £9.9m (2010: £13.5m).

Consolidated Statement of Change in Shareholders' Equity

For the 6 months 31 March 2011

Notes to the Financial Information

For the 6 months ended 31 March 2011

1 Presentation of Half Year Financial Report

General Information

Southern Cross Healthcare Group PLC ('the Company') and its subsidiaries (together 'the Group') are engaged in the operation of care homes for the elderly and the provision of specialist services for people with physical and/or learning disabilities.

These financial results do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 September 2010 were approved by the Board of directors on 7 December 2010 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006.

The Company is a limited liability company incorporated and domiciled in the UK. The address of its registered office is Southgate House, Archer Street, Darlington, Co Durham DL3 6AH (Registered No. 05328138).

The Company is listed on the London Stock Exchange.

The Group consolidated half-yearly financial information was approved for issue by the Board of directors on 19 May 2011.

Basis of Preparation

This condensed consolidated half-yearly financial information for the half-year ended 31 March 2011 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim Financial Reporting" as adopted by the European Union. The half-yearly condensed consolidated financial report should be read in conjunction with the annual financial statements for the year ended 30 September 2010, which have been prepared in accordance with IFRSs as adopted by the European Union.

At the start of the previous financial year, the Group changed its internal reporting cycles and now reports on a calendar monthly basis (previously the Group reported 13 periods of 4 weeks). The results for the period ended 31 March 2011 are therefore for a period of 182 days (FY 2010 185 days).

Going concern

Introduction

This interim report is prepared on the basis that the Group is a going concern. In considering the basis on which to prepare this interim report, the Board has taken into account a decline in new Local Authority admissions, a lower than originally expected round of fee increases (and in some cases requests for decreases) from Local Authorities and as a consequence pressure on its current and future cash position, coupled with potential breaches of the covenants attaching to its banking facilities. As a result it is undergoing intense negotiations with its landlords and lenders with a view to agreeing both a restructuring of its rents and to ensure the longer term availability of its banking facilities; the final outcome remains uncertain.

The Board considers that, whilst it will be difficult, it is reasonable to anticipate that the Group will be able successfully to conclude these discussions in both the short term (the Summer Platform referred to below) and the longer term, but recognises there is material uncertainty with respect to the timeframe and achievability of this.

Discussions with Landlords and Lenders

In forming its opinion as to going concern, the Board has prepared cash flow projections based upon its assumptions as to trading, as well as the continued availability of its banking facilities. The Group's cash flow projections and underlying assumptions reflect the Board's expectation that the Group will reach agreement on long term rent reductions with its landlords and the continued availability of banking facilities from its lenders. The Group has engaged the services of KPMG, Greenhill and Clifford Chance to assist the Group in its discussions with financial stakeholders in pursuit of a significant restructuring of its lease obligations to its landlords and its banking facilities, and the introduction of new capital.

The Group's existing bank funding arrangements comprise a Revolving Credit Facility of up to £50m. The terms of that facility include covenants based on operating performance, and a breach of those covenants could result in withdrawal of the facility. Because of the likelihood of a covenant breach, in March 2011 the Group requested, and in April 2011 its lenders agreed, to defer the testing of all financial covenants until 31 May 2011, subject to weekly review and other conditions.

On 9 May 2011, and in line with the existing agreement, the Revolving Credit Facility stepped down from £50m to £45m. The Group recently requested, as a result of concerns arising from updated cash projections, that its lenders agree to the facility limit being restored to £50m and the testing of all financial covenants be deferred, in each case until 30 June 2011. The lenders have now agreed to this request. The continued availability of the facility is subject to weekly reviews and the satisfaction of other conditions.

The Group has commenced discussions with its lenders regarding the four month Summer Platform and the longer term availability of its banking arrangements and to agree suitable financial covenants which better reflect its current and future expected levels of trading and performance, in the context of the wider restructuring.

The Group has been engaging its landlords in discussion with regard to the level of rent payments and other lease terms for some months and in recent weeks this has been stepped up. Each landlord has been approached with a proposal to agree concessions which would assist the Group. Following Group presentations to landlords in April and May, the Group has made a request for a four month Summer Platform to allow time to develop further its proposals in what is a complex situation. As part of the Summer Platform, landlords have been asked to agree to a four month deferral of 30% of the current aggregate rent charge with effect from 1 June 2011. The combination of landlords agreeing to the requested deferral of rent and the continuation of the restored facility at the £50m level should provide sufficient liquidity for the Group to continue meeting its obligations until 30 June 2011. Current forecasts suggest, however, that additional liquidity support will be required to enable the Group to continue to meet its obligations over the balance of the four month Summer Platform. The Group's principal landlords have agreed to the formation of a committee, to act as an efficient conduit for the restructuring discussions and to ensure that negotiations continue to progress in a timely manner.

The Group needs to reach agreements with its landlords and lenders in support of the Summer Platform. Furthermore, even if a Summer Platform is agreed, there remains the challenge of negotiating a longer term restructuring of the rental and other terms of the Group's lease portfolio.

Other factors that the Board has considered in preparing this interim report are:

·; The impact of the recent reduction in occupancy levels, particularly through reduced admissions from Local Authorities, which have a material impact on cash flow and profitability of the Group.

·; The downward pressure on average weekly fee rates being paid by Local Authorities which are reducing the Group's profit margins, particularly as a large proportion of the Group's costs are subject to inflationary pressures and that while tight cost control is critical, the Board does not intend to make reductions to the quality of care it delivers or to put residents at risk.

Conclusion

The matters set out above indicate the existence of material uncertainties which cast significant doubt over the Group's ability to continue as a going concern. In the event that the Group does not reach agreements with its landlords and lenders, and no alternative finance is available, the Group is unlikely to be able to continue to trade. In these circumstances additional liabilities and provisions may arise and adjustments may be required to the carrying values of assets. Despite these concerns, the Board confirms its belief that it is appropriate to use the going concern basis of preparation for this interim report.

2 Accounting Policies

Changes in accounting policy

Other than as described below, the accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 September 2010, as described in those annual financial statements.

Adoption of new and revised International Financial Reporting Standards

The following standards, interpretations, and amendments to standards were effective during the period to 31 March 2011 and have been adopted in this financial information.

Annual improvements to IFRSs (2009) (effective 1 January 2010). This is a collection of amendments to 12 standards as part of the IASB's programme of annual improvements. The standards impacted are:

·; IFRS 2, "Share based payment"

·; IFRS 5, "Non current assets held for sale and discontinued operations"

·; IFRS 8, "Operating segments"

·; IAS 1, "Presentation of financial statements"

·; IAS 7, "Statement of cash flows"

·; IAS 17, "Leases"

·; IAS 18, "Revenue"

·; IAS 36, "Impairment of assets"

·; IAS 38, "Intangible assets"

·; IAS39, "Financial instruments: Recognition and measurement"

·; IFRIC 9, "Reassessment of embedded derivatives"

·; IFRIC 16, "Hedges of a net investment in foreign operation".

Most of the amendments are effective for annual periods beginning on or after 1 January 2010; early adoption is permitted, subject to EU endorsement. At the date of approval of this consolidated half-yearly information, the following new standards, interpretations and amendments were issued but not yet mandatory for the Group and early adoption has not been applied.

International Financial Reporting Standards ("IFRS")

·; IFRS 9, "Financial Instruments: Classification and Measurement"

International Financial Reporting Interpretations Committee ("IFRIC") interpretations

·; IFRIC 19, "Extinguishing Financial Liabilities with Equity Instruments"

Amendments to existing standards

·; Amendment to IFRS 1, "First Time Adoption: Financial Instrument Disclosures"

·; Amendment to IFRS 1, "First Time Adoption: On Fixed Dates and Hyperinflation"

·; Amendment to IAS 12, "Income Taxes' on Deferred Tax"

·; Amendment to IFRS 7, "Financial Instruments: Disclosures' on Derecognition"

·; Amendment to IFRIC 14, "Prepayments of a Minimum Funding Requirement"

·; Annual Improvements to IFRSs 2010.

All the IFRSs, IFRIC interpretations and amendments to existing standards are endorsed by the EU at the date of approval of this consolidated half-yearly financial information with the exception of IFRS 9, the amendment to IFRS 1, "First Time Adoption: On Fixed Dates and Hyperinflation", the amendment to IAS 12 and the amendment IFRS 7.

There is no material impact of the adoption of this standard in this half-yearly financial information. The future financial effect of the adoption of this standard will be dependent on the circumstances surrounding the future transactions to which they will apply, that are at present unknown.

Exceptional Central Costs

Exceptional central costs are events or transactions that fall within the activities of the Group and which, by virtue of their size or incidence, have been disclosed in order to improve a reader's understanding of the financial information.

Seasonality

Previously, trading results of the Group have been subject to seasonal fluctuations, with stronger financial performance in the second half of the financial year, reflecting Local Authority fee increases in April and seasonal increases in occupancy. However, in line with the previous financial year and due to financial constraints within Local Authorities, significant uncertainty exists in respect of the seasonal variations.

3 Segmental Analysis

Included below is segmental analysis of average occupancy and income statement items for the two operating segments - Elderly Care and Specialist.

Note: At the beginning of FY2011, the Group has reclassified 1,303 rooms as single occupancy. In order to present information on a like-for-like basis, the available beds for FY2010 have been restated to reflect this adjustment. This has had the net impact of reducing the number of available beds across the Group in FY2010 by 1,303 beds, and increased average occupancy for H1 FY2010 by 2.9%.

The segment results for the 6 months ended 31 March 2011 were as follows:

Other expenses:

Segment assets and liabilities:

Other segmental items:

Capital expenditure 

Unallocated liabilities comprise non-current borrowings of £18.7m, current borrowings of £0.6m and derivatives of £0.1m.

The analysis includes the charge in the period for future minimum rental increases. Excluding the impact of this charge, Home EBITDA before central costs is as follows:

All of the above activities relate to continuing operations.

The segment results for the period ended 31 March 2010 were as follows: 

Segment assets and liabilities:

Other segmental items:

Capital expenditure

Unallocated liabilities comprise non-current borrowings of £24.1m, current borrowings of £0.7m and derivatives of £0.4m.

The analysis includes the charge in the period for future minimum rental increases. Excluding the impact of this charge, Home EBITDA before central costs is as follows:

All of the above activities relate to continuing operations.

4 Exceptional Central Costs

During the period the Group incurred non-recurring, exceptional costs of £4.7m. Of this, £0.6m related to the "New Horizons" programme with the majority of the programme now complete. Other exceptional central costs totalled £4.1m, and related primarily to costs incurred in respect of the ongoing restructuring.

5 Impairment of Property, Plant and Equipment, Onerous Contracts and Related Impairments and Additions

Impairment of Property, Plant and Equipment

During the period the Group has conducted an impairment test on the carrying value of fixed assets and goodwill. As required by accounting standards, it has performed this review based on its current contractual obligations (including current rental agreements), rather than those terms it is pursuing as part of its exercise to restructure its property leases. As a result of this review, the carrying value of fixed assets has been impaired by £48.6m, of which £46.3m related to the Elderly Care segment and £2.3m to the Specialist segment. If the Group is able to agree amendments to its lease terms with its landlords, then some or all of the impairment of fixed assets may be reversed.

The impairment review has also resulted in the write off of the Group's goodwill. Further details are given in note 10.

During the period the Group has reviewed the carrying values of its freehold properties. Following this review, a number of properties were found to have a fair value less than their carrying value. As a result the carrying value of the related freeholds has been written down by £1.3m.

As at 31 March 2011, the carrying value of freehold assets held for sale was £12.7m (2010: £29.2m) and related to thirteen freehold properties which the Group expects to sell in the near future.

Onerous Contracts and Related Impairments

During the period, management took the decision to close two of its care homes. As a result, a charge of £5.0m has been recognised in respect of onerous contracts. Included within the £5.0m charge are related impairments of £0.3m. Further disclosure is included in note 13.

Property, plant and equipment

During the period, the Group had fixed asset additions totalling £13.3m (2010: £18.8m) relating to property, plant and equipment. Within this total expenditure the improvement of leasehold property amounted to £1.5m (2010: £1.2m), development expenditure on new properties £nil (2010: £2.4m), investment in IT systems £2.3m (2010: £0.7m) and £9.5m on the underlying portfolio (2010: £14.5m).

6 Taxation

The current period tax charge for the period ended 31 March 2011 represents an effective tax rate of nil. The effective rate is lower than the average standard rate of corporation tax in the United Kingdom (27.0%) due to the trading position of the Group and the inability to recognise any losses arising in the period as a deferred tax asset prior to any restructuring of its operating lease portfolio.

Ongoing negotiations with landlords regarding rent reductions give rise to uncertainty over the going concern of the Group, and accordingly the deferred tax asset has been written off within these interims. If a rent reduction is agreed then this may have an effect on the future minimum rental increase accrual. Given that the Group received a tax deduction for this accrual if any reduction in the accrual is agreed as a result of the rent negotiations, the Group could be liable to a tax charge.

7 Loss per Ordinary Share

Basic loss per share is calculated by dividing the loss for the period attributable to ordinary equity holders of the parent, by the weighted average number of ordinary shares outstanding during the period.

Diluted loss per share is calculated by dividing the loss for the period attributable to ordinary equity holders of the parent, by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

The Group presents exceptional items and future minimum rental increases on the face of the income statement. Items that are considered exceptional, by virtue of their size or incidence, are disclosed in order to improve a reader's understanding of the financial information. To this end, additional basic and diluted earnings per share information is also presented on this basis. Reconciliations of earnings and the weighted average number of ordinary shares used are set out below:

8 Dividends Paid and Declared

The Directors have decided not to recommend an interim dividend (2010: £nil).

9 Bank Overdrafts and Loans

Bank loans due after one year relate to drawings on the Revolving Credit Facility, repayable in September 2012. Due to the likelihood of an impending covenant breach the Group has agreed terms with its lenders by which the testing of all financial covenants has been deferred until 30 June 2011. Upon any covenant breach, loans may become immediately repayable.

Note

Long-term financial liabilities of £18.7m disclosed within the balance sheet are presented net of loan arrangement fees totalling £2.4m.

10 Goodwill

Impairment Test for Goodwill

Goodwill arising on acquisitions, as noted above, is not being amortised but tested annually for impairment. The Group tests for impairment at the 30 September and 31 March, unless there is a clear indication of impairment.

The Group conducts impairment tests on the carrying value of goodwill, based on the recoverable amount of cash generating units ('CGUs') to which goodwill has been allocated. The recoverable amounts of CGUs are determined from in-house calculations. As required by accounting standards, it has performed this review based on its current contractual obligations (including current rental agreements), rather than those terms it is pursuing as part of Its exercise to restructure Its property leases.

The key assumptions in the value-in-use calculations are the discount rate applied, the long-term operating margin and the long-term growth rate of net operating cash flows. In all cases, the Group prepares cash flow forecasts derived from the approved budgets for the next 5 years following which it extrapolates cash flows on an estimated growth rate of 3%, excluding inflation. The growth rate applied does not exceed the growth rate for the industry and country in which the Group operates.

The pre-tax rate used to discount the forecast cash flow for all CGUs is 12%. This rate represents a pre-tax rate that reflects the market value of money at the balance sheet date.

The long-term operating margin assumed for a CGU's operations is primarily based on past performance at home level except where management have a strong belief that a different profit margin can be achieved.

During the period, the impairment review has resulted in the write off of all of the Group's goodwill, of which £204.0m related to the Elderly Care segment and £15.2m related to the Specialist segment.

11 Share Capital

12 Cash Flows from Operating Activities

Reconciliation of operating loss before taxation to net cash flow from operating activities:

13 Provisions and Similar Obligations

The provisions for vacant properties relates to rents payable on leased properties. During the period, £5.0m was charged to the income statement In respect of two vacant properties. Of the £11.7m provision relating to vacant properties, £1.5m is expected to be utilised within one year with the remaining £10.2m to be utilised in more than one year.

The provision in respect of onerous contracts was £12.9m at 31 March 2011. Of this, £7.3m is expected to be utilised within one year, with the remaining £5.6m to be utilised in more than one year.

At 30 September 2010, the Group had £0.2m of other provisions, which have been fully utilised in the period. A further provision of £0.2m has been recognised in the period relating to exceptional central costs in accordance with IAS17. It is expected this will be fully utilised within one year.

14 Related Party Transactions

In the opinion of the Directors, there is no ultimate controlling party.

15 Events after the Balance Sheet Date

The Group has taken the decision to close Sefton Park Care Home in Lanarkshire because the building is no longer fit for purpose. The residents of Sefton Park, their families and staff have all been informed of the decision to close the home and have been given 12 weeks' notice.

Southern Cross Healthcare is working very closely with Social Care Social Work Improvement Scotland (SCSWIS) and South Lanarkshire Council - as well as relatives and friends of Residents - to ensure that the relocation of the 35 affected Residents is managed carefully and in an orderly manner over the coming months.